LOAN STEERING AND PREDATORY LENDING
- Author: Ray Good -
With the real estate industry still in high gear from the last five years of skyrocketing prices and low interest rates, predatory lending is at an all time high. The term has no hard definition, but it generally refers to those lenders who go out of their way to offer loans to buyers at substantially higher prices than those buyers would be able to find elsewhere. Predatory lending is a profitable business, and it is often disguised as legitimate lending by unscrupulous lenders or their agents.
It often works like this: An agent working for a lender, perhaps on their own, tells a prospective loan applicant that he or she doesn't qualify for the mortgage for which they applied. The agent adds that not only will this lender not approve them for a mortgage, but in all likelihood, neither will any other major lender. The agent then assures the borrower that everything will be all right, because he knows of a lender that can get the customer a loan.
At that point, he refers the customer to this other lender, with whom he is working. This lender will make a loan available to the buyer, but the loan has a high interest rate, exceedingly high closing costs, and a prepayment penalty that will make it quite difficult for the buyer to refinance later. The buyer, not knowing any better and feeling as though he or she cannot do any better elsewhere, signs the contract and accepts the high-priced loan.
The shady dealings don't end there. Often, such predatory lenders are interested in not only the loan proceeds, but the property itself. By offering high priced loans to people who may have credit and/or income problems, the lenders may be banking on the buyer being unable to meet their monthly mortgage payment. Once the buyer defaults, the lender can take the property through foreclosure and sell it at a profit. The lender gets property that they can easily sell, and the agent gets a commission from the loan and another kickback once the house is sold. The buyer, unfortunately, is left with damaged credit and no place to live.
Loan steering, as this practice is called, is most common in areas where buyers are poor or have credit histories that may make them less likely to qualify for a loan with a major lender. The people who practice this form of predatory lending are easily able to take advantage of customers who either don't know any better or those who think they cannot find a better deal with another lender.
If a lender denies your loan application and assures you that no one else will lend to you and then offers to send you to someone who will, be suspicious. It's much easier to simply check with other lenders yourself than to fall into a predatory lending trap.
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